In the interest of making sure our investors fully understand our business, we want to discuss the principal risks that we manage.* These risks include: Interest rate risk Credit risk Liquidity risk Valuation risk Cyclical industry risk Interest rate risk — Hedging strategies We have exposure to changes in interest rates in our operations, which we work hard to mitigate through our hedging programs. The primary objective in our hedging strategies is to mitigate the impact of interest rate changes on the economic or net portfolio value (NPV) of our balance sheet. Secondarily, we hedge to mitigate the negative impact of interest rates on earnings through a variety of interest rate environments, subject to our NPV discipline. Our hedging strategies incorporate a micro-hedge on our servicing assets and mortgage loan pipeline that is monitored and managed on a daily basis. Additionally, we duration match fund the mortgage securities available for sale and mortgage loans held for investment with FHLB advances. While we have been effective to date in our hedging strategies, there can be no guarantee that our hedging strategies will be effective in all environments. Credit risk — We have, and must manage significant credit risk both in our loan portfolios and in certain securities we retain from our securitizations. MORTGAGE LOANS HELD FOR INVESTMENT AND HELD FOR SALE We price all of our mortgage loan production on a basis that is intended to compensate us for the credit risk we assume. In addition, we tend to hold a mix of higher credit quality loans in our portfolio of loans held for investment as we tend to sell substantially all of our subprime loan production. SUBDIVISION CONSTRUCTION LOANS We lend to subdivision developers with our primary product targeted to first time homebuyers or first move up buyers where demand remains strong. We also perform substantial up-front underwriting due diligence on these loans. Finally, we are in the process of restructuring and refocusing this business to obtain more synergy with our mortgage lending business. We expect, as a result of this change in strategy, that we will reduce our overall credit exposure to subdivision construction loans and increase our production of permanent home mortgage loans generated by homebuilders. Overall, we believe we have established appropriate reserves for loan losses in our loan portfolios, however, there can be no guarantee that if market conditions were to substantially change, we would not suffer losses above our established reserves. RESIDUAL SECURITIES AND OTHER NON-INVESTMENT GRADE SECURITIES Our non-investment grade securities, including residual securities, represent less than one percent of our assets and six percent of our equity. We have maintained modest levels of these credit risk securities in relation to our production and balance sheet size, as we have developed the ability to sell these interests either at the time of securitization or after retaining such interests for a period of time. We conduct rigorous valuations of these assets and obtain third party reviews of our valuations. Nevertheless, these assets involve more “leveraged” credit risk and require a greater degree of judgment to determine their value. These values could change significantly under different market conditions. Liquidity risk — We depend on continued demand for IndyMac’s mortgage-backed securities by secondary market investors. As a mortgage banker, we sell substantially all of the mortgage loans that we produce. Most of these mortgage loans are ultimately sold in the form of mortgage-backed securities. We can accomplish this directly through the issuance of private-label mortgage-backed securities or alternatively, we may sell loans to government sponsored entities (GSEs), primarily Fannie Mae and Freddie Mac, who in turn sell agency mortgage-backed securities. The mortgage-backed securities market is generally very liquid with continuing demand by large financial institutions, but there can be no guarantee that it will be liquid 100% of the time. Additionally, even if the overall market is liquid there is a risk that there may not be demand specifically for IndyMac’s mortgage-backed securities depending on the performance of the loans underlying IndyMac’s outstanding issues. As a means of mitigating risk, our depository structure provides us with the limited ability to hold mortgage loans on our balance sheet when demand for mortgage-backed securities suffers a temporary disruption. We have substantial liquid resources of more than $2 billion and the ability to raise additional deposit funding and FHLB advances. The GSEs also purchase loans for their own portfolios and may continue to be a strong outlet for our mortgage production even in a disrupted mortgage-backed securities market. We sold 60% of our mortgage production to GSEs during 2001. If a market disruption were to last for an extended period, we would have difficulty sustaining our earnings performance, as a significant portion of our earnings depends upon our ability to sell our mortgage production. Valuation risk — We hold assets that require significant assumptions and judgment to appropriately value. As a mortgage banker, we hold assets in our investment portfolio that we create in connection with the sale or securitization of mortgage loans. These assets consist primarily of mortgage servicing rights, AAA-rated interest-only securities and non-investment grade securities (including residual securities). These assets represent eight percent of total assets in the aggregate and less than one percent in the form of non-investment grade and residual securities. To properly value these securities, we utilize complex financial models that incorporate significant assumptions and judgments, which could vary significantly as market conditions change. Cyclical industry risk — The mortgage industry is a cyclical business that performs better in a lower interest rate environment. Because we are small relative to the market as a whole, we continue to focus on growth metrics that will drive mortgage production. For example, as interest rates rose during 2000, the overall mortgage market declined approximately 20% while we were able to generate mortgage production growth of 48%. Our investment portfolio of servicing related assets also helps to mitigate, to a certain extent, the negative impact of declining mortgage production, as this portfolio tends to perform better in a rising interest rate environment. We also must be disciplined stewards of our investors’ capital. In this regard, we would expect to raise capital at the peaks of our cycle and return capital to shareholders via our share repurchase program should we see a temporary reduction in our business and our share price. If we can execute on this plan, we expect to be able to provide greater returns to shareholders over the long term. *For a more extensive and detailed discussion of our risks, please see our Annual Report on Form 10-K, Item 1: Business — Risk Factors That May Affect Future Results.